US service sector grows at slowest pace in 2 years

WASHINGTON  U.S. service companies grew in June at the slowest pace in nearly two and a half years, a troubling sign for the economy.

But those same firms boosted hiring last month, adding to other data that show job growth may have picked up.

The Institute for Supply Management said Thursday that its index of non-manufacturing activity fell to 52.1 last month from a May reading of 53.7.

The reading was the lowest since January 2010. Still, any reading above 50 indicates expansion. The sector has grown now for 30 straight months.

Service companies employ roughly 90 percent of the economy. They include retail, construction, financial services, health care and hotels, among others.

The industry has weakened at a time when the broader economy has lost vigor. U.S. employers have scaled back on hiring. Paychecks are barely keeping pace with inflation, making consumers less confident in the economy. Consumer spending, which drives 70 percent of economic activity, didn't increase from April to May.

Still, the report included some hope that the job market is getting better. A measure of employment showed that service firms added more workers last month. The employment index rose to 52.3, up from 50.8 in May.

Other data Thursday supported the view that hiring improved slowly last month.

Weekly unemployment benefit applications dropped by 14,000 to a seasonally adjusted 374,000, the Labor Department said Thursday. That's the fewest since the week of May 19.

And payroll provider ADP said businesses added 176,000 jobs last month. That's better than the revised total of 136,000 jobs it reported for May and, if sustained, would be enough to lower the unemployment rate.

The ADP survey has often deviated sharply from the government report, so economists approached the June results with some caution.

In May, the Labor Department said employers added just 69,000 jobs, the fewest in a year and nearly half ADP's estimate. The ADP report only covers hiring in the private sector and excludes government job growth.

And most other recent economic indicators have been disappointing.

A separate survey by the ISM said manufacturing shrank in June for the first time since July 2009, which was one month after the recession ended. Production and exports declined, and the number of new orders plunged in June.

One hopeful sign for the economy: Gas prices have fallen more than 60 cents per gallon, on average, since peaking in early April. Lower gas prices give consumers more money to spend elsewhere, such as on meals at restaurants, vacations and other services that drive growth.

The service sector includes low-paying positions in retail and restaurants. But it also covers higher-paying jobs in professions such as information technology, accounting and financial services.